One . . . Two . . . Three strikes – you’re out! This phrase can strike anger, joy, or even fear into the heart of a baseball player (depending on the situation). Three chances for a hit were squandered, and the opportunity has been lost. In the Bearish Three Line Strike pattern, on the other hand, those three short striking candlesticks are followed by a longer candle with the opposing sentiment. The arrangement of candles doesn’t indicate a “strike out,” as you might expect. Following a downtrend, the trio of descending black candles and the subsequent white candle actually demonstrate that a continuation of the current trend is probable.

Bearish Three Line Strike

Formation

The Bearish Three Line Strike contains four candles: three “strikes ” down and a fourth candle that brings the price back up. To spot this rather rare signal in the wild, keep a close eye out for the following characteristics:

First, a downtrend must be in progress. Second, a black (or red) candle must appear on the first day. Third, another black candle must appear on the second day, closing higher than the previous day. Fourth, a third black candle must appear on the third day, again closing higher than the previous day’s close. These candles continue the established downtrend. Fifth, those three escalating black candles should be followed by a white (or green) candle, which opens lower than the previous candles but then rises up, closing above the first candle’s opening price. In the end, this fourth candle should contain the real bodies of the three previous candles within its length.

Note that there is a bullish version of this signal, the Bullish Three Line Strike, which contains three white candles followed by one black. To learn more about this pattern, please review the previous blog post.

Meaning

Before we arrive at the scene, the bears are in control and there is a strong downward movement. This movement is bolstered by the appearance of the three black candles, each one pushing the price lower than the candle before it. The fourth day, however, brings a powerful surprise: the bulls have regained strength and propelled the price higher and higher. The resulting white candle engulfs the previous candles, erasing the progress of the bears.

Although it might seem that the reversal of sentiment shown on the fourth day is an indication that a reversal is likely, in fact the opposite is true. The reversal’s magnitude and speed pose a risk for those betting on a reversal. Instead, the downtrend should be expected to resume.

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You know the drill: before making a move based on the presence of the Bearish Three Line Strike, wait for confirmation. Look for a black candlestick, a large gap down, or a lower close.

Good luck!

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